Road to FIRE #6: It’s a marathon, not a sprint

The path is long and requires dedication. How far are you willing to go? (credit)

Congratulations, you’ve reached the last post for this series of “Road to FIRE”. My goal was to complete this before the new year and it looks like I’ve just squeaked under the deadline. For this post, I am just going to cover what your longer term aims might be now that you have your savings habit setup and you’re slowly building up a Stocks & Shares ISA.

What’s next?

That’s entirely up to you. What do you want to do?

With a six month cash buffer and no debt you now have options. You may decide that you’d like to purchase a property somewhere and want to save up for a house deposit (personal aside: avoid buying in London, it’s just stupid silly levels around here). You may decide that getting a six months buffer wasn’t too bad, so why not shoot for one year of savings?

Perhaps you’ve got your eye on a new car, a luxurious holiday somewhere or you’ve decided your job sucks and you want to train in something more interesting. Set a goal, work out the path towards it and go for it! Just avoid debt and keep your cash buffer while you’re doing it.

My own goals

Without going into too much details of my own financial life (that’ll be a later post), I am aiming for the full FIRE (Financial Independence, Retire Early) experience. I may not actually “retire” per the normal definition, but rather transition to a role that I would find more interesting on a personal level than my current work life and it will probably be far less well paying. For that, I will need to carry on my savings for at least another 6 or so years. After that I’ll be focusing more on “nice-to-have” luxuries in life but honestly nothing is set in stone.

Over the next 10 years I have until I hit 40 I have a few financial milestone goals I want to achieve (in ascending order of difficulty):

  • Generate enough income from my ISA to pay bills (I actually achieved this last year)
  • Fill up my S&S ISA to the £20,000 limit each year
  • Generate enough income from my ISA to pay council tax + bills
  • Generate enough income from my ISA to pay the mortgage + CT + bills
  • Pay off the mortgage entirely
  • Load up my pension with the max yearly contribution (currently £40,000/year)

I also have a bunch of non-financial goals but that’s for another post. But as you can see, I’m trying to go nearly full tilt towards FIRE and that does involve a lot of focus on the financials. Don’t worry though, I still have fun with friends and family along the way – I do not live a deprived life of any sort!

No quick and easy solutions

I’ve been saving fairly aggressively since about 2013 but my salary was much much lower back then. In the past 4 years my salary has grown rather dramatically but my lifestyle costs have remained pretty low on the whole. Buying a house with my wife actually saved me money as instead of paying for a mortgage on a flat on my own, sharing a mortgage on a bigger house in London has worked out cheaper a month – go figure.

Based on my spreadsheets (I know of no self-respecting FI aspirant who doesn’t have one) I am roughly 40% of the way towards my goal of FI. I didn’t properly start reading and exploring what FIRE was until about 2017, so while that progress may seem slow to some, I am now laser focused on achieving it and I think that percentage number will increase by leaps and bounds over the coming years as I reduce my spending and increase my savings further.

My point is, there’s no fast way there. You need to do the work and stick it out. Sometimes you wonder if it’s worth it. Sometimes you just want to blow the whole lot on a crazy purchase just so you feel you’re getting something out of all this saving (…and that’s a future blog post too… *ahem*). I’m not even half way yet and I can tell you the amazing difference it has made at my own workplace. I do not get as stressed. Everything can be managed. I’ve developed somewhat of a reputation for being “unflappable”. That’s a nice reputation to have. I’m pretty sure my bosses don’t know it’s because if the work becomes too much I will just head off to greener pastures, but hey-ho…

A new year approaches

This savings and time graph has a hidden secret…

You know the cool thing about the above graph from my savings habit post? The curve looks exactly the same no matter what amount of money you wish to save, only the numbers on the left hand side (the scale) change. So when you have a financial goal, take a look at how much less time it will take to achieve it if you can nudge your savings rate to the right of the graph, if only a little.

I’m not a great fan of new year resolutions. If you need to do something, then just get on with it! However, it is the perfect time to reflect on the past year and look forward to what you want to achieve. How about yourself, what challenges will you set yourself next year?


Road to FIRE #5: Let’s open an investing account!

It’s just not a proper investing blog post if there’s not growing piles of money with plants on them (credit)

I hope you had an excellent Christmas! But let’s return to the task at hand.

You’ve worked out your spending. You’ve cleared your debts. You’ve got a savings buffer just in case. And you’ve read about investing and realise it will build your wealth better than any savings account currently available. The next step is to actually start investing! And I will provide step by step instructions to get you up and running. Let’s begin.

The Vanguard of your investing

Crushing competitors fees since 1975!

For this guide I will be recommending Vanguard Investor. There’s a whole load of different platforms out there, of which Monevator has done a near-complete listing with all the pros and cons of each one and their associated fees. I myself have used them for the past 2 years and have no problems with their services offered. I have a few years of ISA allowances tied up in the Vanguard platform. For new entries to investing though, they have an extremely simple fee structure:

  • 0.15% (or £1.50 per £1,000 invested) a year platform fee
  • 0.07-1%+ (or 70p-£1 per £1,000 invested) a year on each ETF you decide to invest in (more on that later)

And that’s it. No fees to buy or sell ETFs. No fees to move an account to them, or away from them. Their platform fee is one of the lowest around percentage wise and their funds cost about the same at the more expensive platforms. As always though, do your own research. But for a new starter to investing it’s hard to go wrong with them unless you want to invest in something they don’t offer – they only offer Vanguard funds. As you become more confident with investing, you could consider moving to another platform if they offer something more attractive to you – this is personal finance after all – everyone has a different plan.

The absolute most important part is to start!

An aside about ISAs

Every year, the UK government allows you to save up to £20,000 (for tax year 2019/20) in an ISA (Individual Savings Account). This benefit is absolutely incredible and frankly unmatched in any other country in the world that I’m aware of. Money put in these accounts is free from Capital Gains Tax, Dividends Tax, tax on interest from bonds / cash and, if you die, your spouse/partner can inherit the entire amount and keep all those tax sheltered benefits (since 2018)!

In short, once the money is them, pretty much everything you can have in an ISA is tax-free from this point (with some caveats, but don’t worry about this yet). There are several types of ISAs but the one we’re interested in is a ‘Stocks & Shares ISA’ which holds, you guessed it, stocks and shares. If you have already opened one in this tax year, get it filled up as much as possible – you lose the allowance if you don’t use it.

Basically, use an ISA to invest. If you’re hitting the £20,000/year limit then you are rich enough to get some financial advice on what to do next.

Opening an account

  1. Navigate to the Vanguard website and click ‘Open an Account
  2. Start an application:

  3. Open a new Stocks & Shares ISA account:

  4. Read the information carefully and make sure you are eligible for the conditions required to open an ISA account with Vanguard.
  5. Usually you would pick what you fund(s) you want to invest in on this screen but for now, just setup a cash transfer once a month. The minimum Vanguard allows is £100 a month or a £500 one-off amount. We’ll go through possible fund options later, it’s easy to change the Direct Debit.

  6. Fill out all the required personal details (including National Insurance number) and create a username and password.
  7. Setup the Direct Debit instruction for £x/month from your bank account. I would recommend setting up the execution date to be a couple of days after your pay cheque so that you aren’t tempted to spend it instead…!

And that’s about it really. You have a Vanguard ISA setup and a temporary Direct Debit taking cash from your account and putting it into your ISA where it is now tax-free for all gains you’ll make in the future. The next step is to decide what to invest in.

Picking a fund / ETF

I do not (and cannot) offer investment advice. I have to be very clear on that. Always do your own research before investing in something and if you don’t understand it, I would say keep clear of it. What I can do is tell you how I set up my wife’s ISA. She has no interest in investing despite my (exciting, entertaining and well thought out*) discussions with her so she just wanted something she could chuck some money into every month and then forget about.

* Well I think they are – my wife might disagree

In terms of ‘fire and forget’ products that Vanguard offer – the most prominent are their LifeStrategy funds:

The full list of Vanguard LifeStrategy funds offered in the UK (credit)

These funds are basically Vanguard’s interpretation of a global tracker index with a mix of bonds (fixed income) and equities (shares). You should dive into the excellent information packs provided with each one (click on the links on that page) to see what they consist of. On the whole they are well diversified across a number of countries and companies. The nice thing about these funds is that they re-balance as they go along, meaning if shares suddenly rocketed 100%, Vanguard would take those winners and move them into bonds to keep the bonds/equities percentage split. My more manual approach means I probably tinker too much with my portfolio.

The biggest choice to make with these funds is how much risk can you handle? Vanguard has a nice article on determining which one may be suitable for you. Equities can offer higher returns than bonds, but also carry far more volatility. How would you feel if the value of your portfolio dropped 30% tomorrow? Perhaps a 40/60 or 60/40 portfolio would allow you to invest with confidence starting out?

Seeing as my wife is young and has no need for her invested money for the foreseeable future, she chose to invest in the 80% equities version but do check your risk tolerance with some online tools. Her Direct Debit tops up her Vanguard account just after she gets paid and it gets invested into the LifeStrategy fund and therefore the stock and bonds markets. Once it’s setup, it really is that simple! And then it’s on automatic and a new habit is formed!

I hope you can see that it’s extremely easy and even fun to get into investing! Give it a go before this year’s ISA allowance disappears on 5th April 2020! And I’ll see you in the next post where we discuss the longer term plan of FIRE.


Road to FIRE #4: Starting to invest

This could be your own story, if you’re willing to take a risk (credit)

Investing?! Are you insane?! That’s just gambling on the stock market!

Mentioning stocks and shares to my friends

Investing is a bit of an odd subject sometimes, depending on what group of friends I’m with. My colleagues at work (I work in the IT industry) seem to know what they are and are vaguely aware that their pensions are probably invested in some ‘funds’ or something and they’ll need them to grow a bit over time for their retirements.

My friends from back home (most don’t work in a ‘professional’ industry and are younger on average, but I am generalising here) seem to know that one guy who bought Facebook shares and made a mint when they went up but otherwise consider them the equivalent of heading to the casino and picking your favourite number on the roulette wheel. If it turns up, wahey! If it doesn’t, well, no biggie. More often than not though, it’s met with disinterest and considered something they can’t be bothered with.

Two quite different attitudes and yet somehow both completely wrong. Hmm.

What are stocks & shares?

There is actually a distinction between a stock and a share, but for this post I’m going to refer to them inter-changeably for simplicity. If you want to learn more, here’s a good resource on the difference. But in its simplest form, when you buy a share, you are buying a small (sometimes very small) piece of a company. That share can be bought and sold at will for whatever value someone is willing to sell it to you or buy it off you.

That share also entitles you to receive a dividend from a share (though not all companies return dividends to their shareholders). Dividends are payments from the company you have invested in, sort of as a ‘thank you’ for loaning them your money. These can be paid quarterly, bi-yearly or yearly. Dividends are generally paid out by well established companies, such as all the brand names you’ve probably heard of. While you could try and guess which shares in various companies are going to increase the most, there’s a much better and statistically (on average) more consistent way to buy shares: funds.

Funds & ETFs (Exchange Traded Funds)

A fund (and ETFs which are also funds) is simply a collection of company shares but instead of buying individual shares in each company, you purchase the fund instead. Buying £100 of Fund A would essentially allow you to buy several small pieces of company B, C, D & E which are included in that fund. This is know as diversification or as I put it – ‘not putting all your eggs in one basket’.

You may think Company X is the hot new thing you’ve been hearing about from your friends, but dumping all your money into one stock and crossing your fingers is just large-scale betting. And the odds are not on your side. It is better to have a small number of shares in each of a wide range of companies in various industries.

Taken to it’s logical conclusion – what if you had a small amount of shares in all the major top companies from around the world? Congratulations, you’ve just discovered one of the simplest and easiest ways to get started in investing and benefit from the world’s companies delivering ever better productivity and profits and paying you for the privilege.

Index Trackers

Buying a bunch of companies is far easier than you think (credit)

Simply put, they track an index. What’s an index? For example the FTSE 100 is an index which contains the top 100 UK publicly listed companies. In the U.S. the S&P 500 is an index of the 500 largest U.S. publicly traded companies. If you buy an ETF (a fund) which tracks the FTSE 100 then you are purchasing a small part off those 100 UK companies. When the UK economy is doing well, the share prices of these companies tends to rise and you benefit from this. And who cares if oil companies are having a rough time (BP, Shell) when you have all the other companies chugging along just fine. Diversification is good.

As these are well established companies you will also generally get paid dividends from the index tracker fund. Usually nothing incredible, but the FTSE 100 is currently yielding over 4.5%(!) if you look at the Vanguard FTSE 100 index tracker. That’s better than what you’d get in your savings account.

No guarantees

However, you must always bear in mind the phrase: “Remember that the value of investments can go down as well as up and you may get back less than you invest “. In the short term it is entirely possible you could lose half your money if there is a severe recession… like the one in 2008. The good news is these recessions don’t tend to last more than a couple of years on average and eventually your shares should bounce back.

But this is why investing has to be a long term game. You do not put money you may need in the next 5-10 years in the stock market. This is why you’ve built up your emergency 6 month buffer fund first. Being forced to sell your funds when they have dropped in value is how you lose money in the stock market. Do. Not. Sell.

Assume money you have invested is unavailable for the next decade. The rewards can be high, certainly better than stuffing money under the mattress, most likely better than a savings account, but you have to be prepared to take a risk to get anywhere in life. The stock markets around the world, on average, will increase over time faster than most other easily available options (cash / bonds / gold / property). The FTSE All-Share has returned on average 9.9% a year over the past 30 years. It is not a straight journey up though, there have been bumps along the way.

The returns of the FTSE All-Share over the last 30 years (credit)

If you’re still willing to take the risks to get ahead, then I’ll show you just how easy it is to get started in investing in the next post!


Road to FIRE #3: Building a savings habit

Hard to build and so easy to spend (credit)

Now on to the fun part of building up your savings! When you have savings, the threat of an unexpected bill, worrying about whether you can afford a simple coffee or even just concerns about money in general slowly fade to the back of your mind. The key behind getting good at saving money is to make it a habit and stick with your plan as best as possible.

You will occasionally fail, especially at the beginning as you learn to dial in your spending and work out what you value and want to spend your money on. I myself am partial to the odd coffee out in town, but it is a pretty cheap luxury. At the end of month, check your transactions (if done on a debit card) or write down your expenses as you go in a small notebook or make a note on your phone. I have very few outgoings that require cash, so I generally stick with downloading and reviewing my transactions once a month just to check I haven’t blown my expected spending too much.

Automate your bills

Hopefully you still have your list of monthly and yearly expenses written down somewhere from the first step of this guide. If not, head back to that article and detail them all out now. Depending on how you are paid (weekly, fortnightly, monthly), work out what is paid and when. If possible, arrange Direct Debits for your monthly outgoings and set them up to go out at roughly the same time, ideally just after you get paid. This does three things:

  1. The money is not sitting around in your bank account tempting you to spend it.
  2. Your bills are paid on time and help build up your credit score (missed payments are not good!).
  3. If there are any issues with the Direct Debit not going out (bank issues for example), you are covered by the Direct Debit Guarantee which means you won’t be at fault and the financial institute in question must resolve your issue.

For example, I am currently paid on the last working day of the month. On the 1st of every month, I transfer all the required monies for the coming month to a separate account. From this account I have all my Direct Debits for things such as broadband, utilities, mortgage and mobile phones. I do not take money out of this account as a rule. Within the first week, most of the Direct Debits have been taken and I am clear for another month of my fixed costs! I also get some cashback thrown into the deal as well (take that, council tax bill…)!

I now know that whatever I have left in my normal account is available for the coming month’s variable costs (food, travel, the occasional coffee). Track your discretionary spending for a few months to see what you spend on and consciously consider every purchase.

Do you actually need it? Can you afford it?

Is there another way to get the same thing cheaper?

Ask yourself these questions every time you put your hand in your wallet/purse. It is incredible in this day and age how little thought goes into making a conscious decision for a purchase. I still catch myself occasionally going “I’m hungry and they’re selling burgers over there; I’ll just go get one” (damn you Five Guys and your delicious burgers).

What I’ve actually done is fail to plan ahead. I knew I would be out and I knew I’d have to eat lunch at some point. As I failed to make my own tasty food and bring it from home, the next best option is to get some healthy, not too expensive food instead. I find it very rare there is not a supermarket of some description around and they tend to sell sandwiches and wraps at not entirely extortionate prices. Chalk it up to experience and do better next time.

Savings Rates & Time Periods

Armed with a rough estimate of how much you have left over a month, it’s time to start putting this money to work. Your goal is to build up an amount of savings equal to six months of your outgoings. It doesn’t matter how much money this is equal to – if you save a certain percentage of your income every month you will get there. If you can save a higher percentage, then you will get there faster, if it’s only a small percentage, it will take a bit longer. But you can absolutely do it. Below is a graph showing how long you will need to save up this amount for different savings rates – don’t be discouraged if you’re on the lower end of the savings rates – pay attention to the fact you can actually get there!

How much time (in months) to save up a 6 month buffer, based on a percentage savings rate

Another way to view this data, is to see how savings rates and time periods interact:

An alternative view comparing savings rate and time (in months) to save a 6 month buffer

As you can see, at the high savings rate end (50% savings), you will get there in about a year, which makes sense as if you’re saving half your salary, it’ll take twice as long to get there as opposed to somehow saving 100% of your salary. At 25% savings, it takes 2 years, etc. But note how the left hand side of the graph drops dramatically when moving from tiny amounts, like 5% to even 20%. If your after-tax salary is £1,000/month then moving from £50 (5%) to £200 (20%) reduces the time taken to build your buffer by 30 months! That’s 2 and a half years!

Regular Savers & Savings Accounts

To help you on your way, I would strongly consider setting up a savings account separate from your day-to-day available funds. Putting them in a separate account puts a bit of friction into the process of spending that cash and they don’t usually come with debit cards which is a bonus! There are two types of savings accounts I would recommend (with links to the best current ones courtesy of MoneySavingExpert):

  • Regular Savings Accounts – these are accounts where you can contribute up to a set amount each month and the money is locked away for a year (you can usually close the account at any time and get all your money back, but with no interest paid, if required). These offer higher savings rates than ‘easy access’ savings accounts and are good for building a savings habit as you need to contribute the minimum amount each month to keep the savings rate.
  • Easy Access Savings Accounts – these offer instant access to your money but unlike a regular savings account, the rates tend to be much lower. The money I put in here is when I think I will need it in the near future due to upcoming expenses or a particular item I am saving up for, but which won’t take a whole year to purchase.

Enforcing the habit

Want to know two of the most powerful ways to enforce your savings habit? Set up a regular reminder of what your target is and make sure you’re keeping on track. A money diary / spreadsheet that you keep up to date once a month will show you that you’re making progress and will encourage you to keep on. I still have a spreadsheet that I update every month with the current balances of my various accounts. It is always satisfying to see that, while some months it may be small amounts, my balances have generally crept up bit by bit as I look back months and years ago to where I was.

Use anything and everything at your disposal to get you into the savings habit (credit)

Set up a recurring reminder on your phone that occurs once a week (when you’re not likely to be busy). In this reminder put “My goal is to save £xxx this month, how am I doing?” where £xxx is whatever amount you are trying to save this month. You may be over, you may be under – the point is you are consciously thinking about your spending. If you can get the savings habit going, your future self will thank you.

Feel your financial fears fade away

Even if I achieve nothing else with this blog, if I can encourage you and the rest of the people of the UK to reach the accomplish a six months cash buffer, I feel I would have achieved a great goal for myself and all of us. When you’re not living right on the edge of getting your next pay cheque, when you’re not under crushing debt and the sleepless nights that go with it and when you give yourself that breathing room, you have time to observe the world differently.

Your car tyre got a puncture? You need to go to the dentist and get a filling? You got a parking ticket because you overstayed by 10 minutes? What before was a devastating blow to your finances is now met with mild annoyance and a muttering under the breath of “Dammit, I’m not going to hit my savings goal this month!”. It really is a change of mindset for the better.

However, what if instead of having the ability to not worry about the next six months come what may, we extended that safety net out to one year? Two years? Five years? What’s your limit? What do you want to achieve? I hope you’ll stick around and learn about the next exciting steps for Financial Independence – we still have a lot of ground to cover!


Road to FIRE #2: But what about debt?

Pulling out the plastic is just so easy… (credit)

I want to take a small detour before we dive into what to do with your potential savings. We need to discuss debt – what it is, what it isn’t and why it can be okay in certain instances and horrific in others. I am generally of the belief that debt aside from a mortgage (a loan against the property you live in), at least in the UK, should be avoided and that is only because the UK has a strange obsession with house prices which has led to some very odd incentives for house ownership. But I digress…

What is debt?

Debt is, in simple terms, when you owe someone else something in exchange for a service or good. Financially, this is when you are borrowing money from a person or company and use it to buy something – be that a car, a house, a big screen TV or even groceries. In exchange for lending you this money, most lenders want an additional portion of money back on top of this, called interest. The higher the percentage of interest the lender charges for their lent money, the more money you will have to pay back over a set period of time.

If you borrow £1,000 at 25% interest over 1 year, you will end up paying roughly £1,250 back to the lender. It cost you £250 to borrow that £1,000. I imagine you would much rather keep that money for yourself! Incidentally, the current average credit card interest rate is nearly 25%. If you are currently able to save £100 a month but borrowed that £1,000, then it is going to take you longer to pay off the loan than if you had saved for it in the first place! You could argue that your impatience cost you £250. Or you received the item / service 10 months earlier than if you’d saved, but the express delivery option just cost you £250.

Good debt, bad debt

“But I had to pay the £1,000 then, my car broke down and needed fixing!”

Protesting reader

I agree, in that case you had other option to get to work. However, why didn’t you have some emergency money ready just in case? And this cycles us back to the wider problem in the UK right now – people aren’t saving and are getting into debt. And debt is generally expensive to have. It saps your already limited resources and makes it even harder to save.

So step #1 needs to be – no debt (excluding mortgages) in your life.

If you are already at this point, then congratulations, but I think the “good debts” and “bad debts” needs further explanation. A “good debt” is a debt that either provides a vital service or asset that increases in value over time, such as, traditionally, a property you live in or an education (and frankly even the university education argument might have changed since I went).

A “bad debt” is buying something that either loses value over time or has no real value to start with. Typical examples being a new car, expensive clothes, new toys, an exotic holiday, etc. By all means, if they are that important to you, save up and buy them – but DO. NOT. BORROW. TO. BUY. THEM! The temptation to have what you want right now is always hard to resist, but trust me, you will end up paying far more than you ever wanted to for something that will generally lose its appeal surprisingly quickly.

A whole lot of saving required to get here (credit)

An aside to those with no way out

A quick note before we begin – if you are truly incapable of dealing with your debts and need professional help, there are debt charities and services out there that can help you in the UK. I am writing my blog on the assumption you have some disposable income available. If this is not the case, get in contact with the services below to help right your ship before you truly sink.

Killing your debt ASAP

For the rest of us, draw up a list of all your debts, the amounts owed and the percentage interest rate charged on each debt. You may end up with something like the below fictional example:

  • Credit Card #1 – £5,000 – 25% interest
  • Credit Card #2 – £2,000 – 20% interest
  • Car Loan – £10,000 – 10% interest

This person is paying around £2,650 a year to service this £17,000 debt! Holy shit!

The correct mathematical way to attack these debts is to push all available funds towards the highest interest debt first, then the next highest, then the next highest until all your debts have been paid off. In this case, we would attack the 25% interest debt first, even though the 20% interest debt is smaller and could be paid off sooner.

Returning to our example of our mystery median UK earner from the last post who was earning £19,556 post tax and had basic needs outgoings of £15,000 a year, let’s slap on the £2,650 of debt interest they are paying to service the above debts. From their initial leftover ‘perfect saving’ amount of £4,556 they are down to £1,906 a year to save. Seeing as savings rates have been pretty low for the past decade, it would instead make more sense to pay down the debt ASAP.

Visualising the debt crushing

I plugged the above data into a spreadsheet and calculated roughly how long it would take to pay off the above debt with the resources of our mystery median UK earner. The results were pretty shocking:

First credit card paid off at A (35 months), second credit card at B (43 months) and loan paid off at C (79 months)
(Click to enlarge)

Take a look at that time period. Nearly 80 stupid months or nearly goddamn 7 years to pay off! Over £8,000 in interest to the lenders (red line)! And this is assuming that no further debt is acquired in those 7 years and that all available money, including freed up money from not having to pay the other debts as time goes on, is chucked at this thing.

And the worst part? If they had simply saved their £4,500 a year from the beginning and never taken out the £17,000 in loans, they would have £17,000 in just under 4 years! Instead they paid £25,000 for £17,000 of money. You can see why I am very against debt. It is a massive drain on your life, your mental health and your own well being.

So, people of the UK – I propose to you a very simple message to repeat to everyone:

I do not borrow money for anything but a property or an education. Everything else I will save up for before I purchase it.

Enlightened Reader

And with that out the way, let’s get into what to do with your newfound savings habit!


Road to FIRE #1: Do you even know where your money goes?!

Photo by PS Photography on Pexels.com

Have you ever tried to run a race without knowing where the start and end lines are? Imagine the frustration of not knowing if you’re heading in the right direction, or if you’ve looped back on yourself and are essentially running backwards! Or imagine you’ve already finished and keep fighting on thinking you’re so nearly there… when you actually on the victory lap. You just never realised.

Your starting position is where you are right now. Your finish line is… well that’s a future discussion. But it is important to make sure you’re actually progressing and not standing still, or worse, being dragged backwards by decisions and actions of old. So for today, fire up your bank account’s transaction history, because we are diving into where you are.

What’s coming in?

According to HMRC, the vast majority of taxpayers in the UK are paid via PAYE (Pay As You Earn), where your employer pays you a salary/hourly rate for your work and they handle the taxes due to the government. You receive your payslips with the taxes already deducted and will usually not need to pay extra taxes to HMRC. If you know your pre-tax salary, you can also double check these numbers with a handy income tax checker, such as the very useful one at MoneySavingExpert.

Data from the Households Below Average Income (HBAI) report from the Department of Work and Pensions 2013/14 (link)

The above graph shows that for 2013/14 in the UK, the median salary was £23,556 before taxes which works out today to a post-tax income of roughly £19,556 a year or £1,630/month. Do you earn more than this? Congratulations, you’re in the top half of incomes in the UK! Note that the mode (most common amount), is roughly around £16,000 pre-tax which would equate to roughly £14,418 a year or £1,201/month after taxes.

Once you know what you’re bringing in, it’s important to look at where this money is going.

Finding the leaks

What follows may be a somewhat eye-opening experience; I know it was the first time I sat down and worked out exactly how I was spending my money. If you have a ‘main’ bank account and/or credit card that you do your spending on, download your transactions list. It’s time to do some investigative work! I have my outgoings in a nice spreadsheet I update whenever a change occurs such as switching to a new provider, or I sign up to a new service – I would highly recommend creating your own to give yourself a clearer image of what your outgoings look like at both a monthly and annual level.

Monthly costs will most likely include the following, but if you have more, add them to your list. And be honest with yourself – if it’s something you enjoy monthly, put it in the list with either a solid number or a rough guess. If you have Direct Debits, then it should be easy to find some of these. To start with, stick with outgoings that you are basically required to have in a modern life (we’ll move on to the luxury items later). Your list will probably differ a bit from mine, don’t worry about it.

Examples of required monthly items may be:

  • Rent / Mortgage payment (just your portion if this is shared)
  • Food (not takeaways and restaurants)
  • Electricity & Gas
  • Water
  • Council Tax
  • Landline & Internet
  • Mobile Phone Contracts
  • Petrol / Diesel
  • Subscription Services (Netflix, Amazon Prime, Spotify, etc.)

Do not, of course, forget about your debt payments, such as:

  • Loan Repayments (Car, TVs, Sofas, etc.)
  • Credit Card Repayments
  • Student Loans (if applicable)
  • Other Debt

Then move onto the annual payments you might be required to spend your hard earned cash on. Some ideas to get you started:

  • Insurance (Car, Home, Pet, etc.)
  • Car Tax, M.O.T., Breakdown Cover (if applicable)
  • Annual Travel Tickets / Cards
  • Ground Rent / Maintenance Fees
  • Pet related costs (Checkups, medicines, etc.)
  • BBC TV License

Putting it all together

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After you’ve added up all your monthly costs and multiplied by 12, add on your other annual costs you’ve calculated above. Is this number greater than or smaller than your post-tax income that you calculated previously?

If your outgoing amount is lower than your income, congratulations, you are not spending more than you earn on meeting your basic needs. If it’s higher… then you are on course to serious problems in the not too distant future. Red alert! Turnaround! Iceberg ahead!

If you’ve never seen Titanic – it doesn’t end well.
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And even if you are on the right side, bare in mind that this is to meet your basic needs. I haven’t asked you to include holidays, nights out, takeaways, a new car, Christmas and birthday gifts or that new wardrobe you need to buy every year to keep up with the trends. If you add these in, this may swing you back into the ‘spending more than my salary’ side. You can live above your means for a while, but eventually it will come back to bite you.

And finally, your savings rate

I like to do a pretty simple version of this – take whatever you have left over from your salary and subtract your outgoings you calculated above. We will exclude the ‘luxuries’ for now, just to give yourself a starting point in an ‘imperfect world where you have no fun’. Then divide by your salary and multiply by 100.

For example: someone earning the median post-tax UK wage of £19,556 who has outgoings of £15,000 a year (or £1,250 a month) would look like the below:

(£19,556 – £15,000) / £19,556 * 100 =

23.3% or £4,556 a year saved!

Hold on to this number, because the entire goal of this blog is to get this number as high as possible to lead to even greater things. See you in the next post!


My own story so far

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Believe it or not, I am actually fairly new to the FIRE community. I first heard of the term after stumbling across the always excellent Monevator website and then dived in deeper reading the trials and tribulations of Ermine from Simple Living in Somerset. Both are highly recommended blogs by the way.

While I had never heard of the term FIRE, I had been practising some of the principles by accident even when I was younger (with some mistakes of course!). The problem was, I had no end goal. While I am a fairly frugal person in general, the cash I saved from my day jobs through the years was not being used to do anything worthwhile.

Having recently turned 30, gotten married to an awesome wife and having a bought an actual house (with a mortgage!), I wanted to look back on how I got here and where I hope to go in the future.

A young(er) Xailter

I got my first job at 16 which is the legal minimum age for most full and part-time work in the UK. I worked at my local fast food place earning the very princely sum of about £4.00/hour working every Saturday. I recall making about £35/day doing this work at the beginning which is a helluva lot of money when you’re that age and didn’t get pocket money or anything! I carried on working there through my college days, working Wednesday evenings and all Saturday as I seem to recall. I collected the A levels I needed to attend University and then headed off to a bigger city.

At University I studied Computer Science and achieved my bachelor’s degree. During the holidays I would come home and do full week shifts at the same fast food restaurant to help top up the funds. Back then University fees were £3,300 a year – how things have changed. During this time the Financial Crisis of 2008/9 was going on and I was blissfully unaware of this until I graduated in 2010 and…

Couldn’t get a damn job in the field I wanted.

Keeping up the good fight

I’ve been tinkering with computers, programming and robots for as long as I can remember. I could not imagine working in any other field and I seem to have been born at just the right time to take advantage of having skills in this area. However, I was struggling to get a job in the industry. I sent many applications and most of the time didn’t receive more than a standard reply. Was it me? Did I come across poorly in interviews? Or were there 50 candidates going for every job and I just wasn’t the top 1% they were looking for?

While I never got a definitive answer, I spent the first year of my post-graduate life diligently continuing to work at the fast food restaurant and getting my CV out there as much as possible. Eventually a friend of a friend told me about a graduate role opening up where he worked. Was I interested? Hot damn I was, get me in there! I interviewed, did a day session with some other graduates, had a great time and…

I didn’t get the job. Damn.

Two months later I received a call from the same company saying they were building another graduate team but for a different area of the business. It would be a consulting opportunity where I would travel to customer sites all over the country and build solutions using the companies software. Did I want the job?

Hell yes I did!

I use this story as a strong reminder to myself that some things worth doing can take a long time, but that doesn’t mean you shouldn’t keep going or give up at the first hurdle.

Starting my career

Not the car I bought (Photo by Derwin Edwards on Pexels.com)

The only problem was I didn’t have a car. Fortunately I had been saving a large portion of my money at the fast food restaurant and had about £6,000. I purchased a year-old (oops) Ford Fiesta that I was still driving up until this year. Proof that having even a meagre amount of money can be a huge advantage in a pinch. Since then I have been continuously involved in the IT industry, occasionally moving jobs and learning new technologies, but never allowing myself to get too comfortable (except that one time…).

Around 2017 I started reading about FIRE and realised I could do so much better with both handling my money, making it grow and eventually, perhaps, buy my own freedom from the being at the beck and call of a corporation. I should state I do actually enjoy my job 80% of the time but as I have moved up the ladder I’m starting to find more and more of my time is spent less doing what I like (design and programming) and more time spent stuck in meetings.

The results of applying FIRE

Since optimising my outgoings, getting my wife on board with the plan and learning how to save and invest the money I take home, my savings rate is currently about 80%. A well paying job, a frugal mindset and deciding exactly what I value in my life means I have been able to remove an awful lot of crap from it. While I still have a way to go to being entirely debt free (houses in London are frankly ridiculously priced), I feel I am comfortably on target to hit my end goal of having achieved FI (Financial Independence) by 40.

And I look forward to showing you how you can move towards a better financial life as well.


So what is FIRE then?

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FIRE originally stood for Financially Independent, Retire Early – but there’s as many definitions as stars in the sky these days. Perhaps a better understanding would be:

What would you do if money was not an issue?

No matter what your current situation is, if you had enough money to cover at the very least your basic needs of food, water, shelter and the associated costs of life, what would you do? Would you keep working to build more security? Would you spend all your time on fun hobbies? Would you spend more time with your children? Would you travel more?

This is what I believe is the true definition of FIRE: the freedom to have choice.

How to get there

Why do you go to work in the first place? Unless you are a very lucky individual indeed it’s probably to pay for the costs in your life and to earn some money for fun activities along the way. I know that’s why I am currently employed!

There’s a simple (but not easy) path to get there:

  • Remove all debts from your life (credit cards, loans, mortgages)
  • Reduce your outgoings on stuff you don’t truly care about
  • Build your savings up by spending less than you earn
  • Build a passive income stream or three

This is the path I myself am currently going through and it won’t be achieved through a lottery win or inheritance. The UK has some pretty amazing benefits to help people save their money and keep it sheltered from the taxman, but that’s a story for another article. The most important point on that list is getting out of debt. And it seems the people of the UK are doing the exact opposite of this.

Why I think FIRE is important to spread

The ONS (Office for National Statistics) shows this debt increase in their latest report on UK household debt and provides some rather fancy graphs on how this is broken down, like below:

UK household debt up to March 2018 (source: ONS)

It’s worth having a look through the full report, but as you can see, overall – debt is increasing. Debt is becoming normalised. When you’ve been to university and come out with £30,000+ worth of student loan debt, you’re not going to think having an extra £3,000 on a credit card is that much of a problem.

The problem will only get worse

How many things do you ‘buy’ (rent) on a monthly basis these days? Your car? Your entertainment? Your music? Your food?! Advertisers know that most of us don’t have a lot of disposable cash lying around, so instead of the full upfront cost, these services are being presented as merely £x/month – because it sounds so much more affordable!

Of course, that’s not to say every service does not have value. I myself think that Netflix is good value at £8/month for the programs I enjoy watching, but there are far better, cheaper and easier ways to travel, feed and entertain yourself than the above.

The solution?

To stop following what everyone else is doing and determine what values are important to you. Work out what truly interests you in the world. Look at the bigger picture and ask yourself a very important question:

Who are you and what do you want to do with your life?

I share my thoughts on my own FIRE journey starting from here.


Ignition

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You want to retire by 40?! Are you mad?!

– Friends, family & colleagues

This is a blog dedicated to starting something different in the UK. This is a blog about money, about technology, about the future and how we can all help one another to discover a path towards our desired destinations.

My name is Xailter and I am writing this blog to do exactly what the name suggests: Ignite FIRE. Take the embers and make them grow. If you don’t know what FIRE is, then welcome and you’re in for a treat in getting to learn about the principles! If you do know, then welcome as well, and I hope to add to the conversation with my own journey towards FIRE. Either way, the goal is to increase its visibility and offer you another way to consider your life, with a little fun along the way!

Why Ignite FIRE now?

UK household debt March 2018

The idea for this blog came when I read this article and saw the above graph. Personal debt is the highest it has ever been. This is not healthy. This is not sustainable. Even worse is the sheer amount of confusion, bewilderment and unawareness I have personally experienced from my fellow family, friends and colleagues over various money related issues, beliefs about certain technologies and sometimes a simple lack of interest in their own futures.

These are smart people (with degrees!) with lots of debt who are struggling to provide themselves with the lives they want. I want to show them a better way and I believe a FIRE approach is one of the best ways to do approach this.

Why should I listen to you?

I’m glad you asked, but I want to cover my own story so far in a separate post. In the meantime, I will direct you to the quote at the top of this post and tell you that this is an entirely achievable goal. How will I do this? Read on dear visitor…